About Authors :
1. Gurkaran Singh : From a CA aspirant, to pursuing Bcom(H.), from someone working at PWC to someone pursuing law from Faculty of Law Delhi University, life has been a roller coaster ride for Gurkaran Singh. Presently he is pursuing Law from Law centre 2 Delhi university. He has authored a policy document for ministry of law and justice. He has also worked as a research assistant on a book on mediation
Mobile No.9582017055
2. Jaideep Bhalla : (Company Secretary (Aspirant), LL.B, B.COM Graduate, An Investment Portfolio Analysts, First Runner-up winner Moot Court Competition Organized by ICSI Noida Chapter, Executive Member of Society for Consumer and Investment Protection recognized by SEBI and World Bank)
Mobile No. 7838684213
With the widespread of the Coronavirus the supply chain has brutally hit by the COVID-19 flare-up, it is likely that obligation under numerous agreements will be deferred, interfered, or indeed, even dropped. Counterparties (particularly providers) to agreements may try to defer or potentially stay away from execution (or obligation for non-execution) of their legally binding commitments as well as end contracts, either in light of the fact that COVID-19 has genuinely kept them from playing out their legally binding commitments, or in light of the fact that they are trying to blame it so as to remove themselves from a troublesome bargain. Further, organizations may not be capable to play out their commitments under their client understandings due to their provider’s non-execution and may in go try to defer as well as maintain a strategic distance from execution (or risk for nonperformance) of their legally binding commitments as well as end contracts.
With the future uncertain about the set of the restrictions and obligations which would be imposed post 14th April, in this context, it is an opportune moment to examine the impact of doctrine of frustration and force majeure on the lease agreements.
With the closure of the official leased premises, one of the imperative questions is regarding the payment of the rent.
Would lessee be saved by the doctrine of force majeure and doctrine of frustration, or would he be forced to pay the rent even though his commercial activity has been hit by the forced lockdown?What are the other remedieswhich are available to him? What are the options available to him?
To answer the above mention question it is imperative to understand this we have to first understand the meaning of the doctrine of force majeure and doctrine of frustration and whether or not these doctrines are applicable to the lease agreements?
What do mean by Force Majeure?
Force majeure is a French term meaning superior force refers to an unforeseeable event which excuses the parties from the performance of a legal contract obligation. It implies any unforeseen event or circumstances, beyond the control of man that renders the performance of any contract impossible. Examples of ‘force majeure’ events could be war, civil strife, natural disasters or governmental actions that frustrate the contract and render it impossible to perform by either party. Commercial property rental agreements, for offices and restaurants, do contain such ‘force majeure’ clauses.
Restaurant and retail businesses, which pay the highest rentals, tend to incorporate force majeure clauses in their contracts which would suspend rent payment should any force majeure event occur. Interpreting such clauses assumes importance in the context of Covid-19, which has led to lockdowns and shut-downs across India.
Doctrine of Frustration
The doctrine of frustration is mention under Section 56 of The Indian Contract Act 1872 (“ICA”). The section contemplates that any act which has to be performed after the contract is made unlawful or impossible to perform, and which the promisor could not prevent, then such act becomes impossible or unlawful will become void. The doctrine of frustration comes into play when a contract becomes impossible of performance, after it is made, on account of circumstances beyond the control of the parties or the change in circumstances makes the performance of the contract impossible.
The Court can give relief on the ground of subsequent impossibility if it finds that the whole purpose or the basis of the contract has frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was not contemplated by the parties at the date of the contract would not prevent, then such act which becomes impossible or unlawful will become voidable.
Jurisprudence
At the very outset, it is pertinent to note that the general rule of force majeure and frustration does not apply to lease deeds.The Supreme Court clarified this position early on in Raja Dhruv v. Raja Harmohinder Singh[1], it was held by the Hon’ble apex court, agricultural lands were leased in erstwhile undivided Punjab for cultivation. Such cultivation subsequently became impossible on account of the partition of India. The Plaintiff (the initial lessee) commenced an action for refund of the previously paid rents. The Supreme Court dismissed the claim of force majeure under Section 56 on two broad grounds. First, it held that rights under a lease are not simply contractual rights and are instead governed under the provisions of the Transfer of Property Act, 1872 (“TPA”). Second, the Court reasoned that Section 56 of the ICA does not apply to a concluded contract where no further performance was required. The Supreme Court re-affirmed this position in Sushila Devi v. HariSingh which also involved a claim for refund of rent and deposit in relation to lands that now formed part of Pakistan.
Therefore, in the cases of Covid-19 lockdown, the commercial tenants might cite the doctrine of frustration under section 56 and seek remission of the payment of rent payable during the lockdown period. However, the landlords may rely upon the Supreme Court rulings that since the Doctrine of Frustration of Contract does not apply to leases of property, it would not apply to leave and license agreements also, which form the basis of most commercial rental contracts.
Raja Dhruv v. Raja Harmohinder Singh AIR1024, 1968 SCR (3) 339
Sushila Devi v. HariSingh 2 AIR 1756, 1971 SCR 671
But, that does not mean that the tenants do not have any recourse of law. In the case of DhruvDev Chand vs. Harmohinder Singh and Others, the Hon’ble Supreme Court held that the Doctrine of Frustration under Section 56 of the Indian Contract Act would not apply to leases of land. It, however, held that if the leased property is destroyed by fire, tempest, flood or violence, then the tenant has the option to declare the agreement voidable or non-performable under Section 108 of the Transfer of Property Act, 1882. However, in the light of above, the issue in the case of lockdown notifications issued by the government is that such lockdowns and restrictions are not of permanent nature. This would not permanently affect the long term usefulness of the property.
So, it can be inferred that recourse is provided under Section 108 of TPA. Section 108(B)(e) of the TPA provides “if by fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void …
One of the most pertinent precedent regarding the interpretation of Section 108 is in the case of VannattankandyIbrayi v. KunhabdullaHajee.In this case Supreme Court held that upon the destruction of a building due to fire, the lessee has the option to treat the lease as having become void and avoid further obligation to make rent. However, in the event that such option is not exercised by the lessee, he is not entitled to squat on the land. However, this decision was overturned by the Supreme Court in the case of SahaRatansiKhimji v. Kumbhar Sons Hotel Pvt. Ltd,In this case the Hon’ble apex court observed that merely because the leased premises are destroyed, does not mean that the tenancy stands automatically terminated. Both of above mention decisions deal with situations where the leased premises were physically destroyed and not where tenants were prevented from accessing such premises due to supervening events. Therefore, in the light of above, accordingly it can be said that these both these judgments are no great authority in dealing with the current situation of Covid-19.
There are three conditions which need to be satisfied before any benefit of Section 108{B}{e} can be taken. These three conditions are
- The existence of an ‘irresistible force’
- Property becomes substantially and permanently unfit for use for which it was let
- The lessor must be informed of the lessee’s decision to render the lease deed void.
DhruvDev Chand vs. Harmohinder Singh and Others, AIR 1968 SC 1024
VannattankandyIbrayi v. KunhabdullaHajee (AIR 2003 SC 4453)
SahaRatansiKhimji v. Kumbhar Sons Hotel Pvt. Ltd AIR 2014 SC 2895
Therefore, it can be easily inferred by reading these conditions that in order to take the benefit under Section 108 it has to be established that Covid-19 rendered the property completely and permanently unfit for the purposes for which the property was leased out. In other words it is to be established that Covid-19 in itself is an instance of “irresistible force”. Further, under Section 108(B)(e) of TPA, it is the duty of the lessee to give a notice to the lessor. . If the lessee fails to give notice under Section 108(B)(e) of the TPA, the lease is deemed to remain unaffected regardless of a force majeure event. It is imperative to note that once this notice is sent, the lease agreement between the parties stands terminated.
Conclusion
One of the major concerns during this lockdown period would be regarding the payment of the rent despite the lessee not having the access to the leased property. The question needs to be answered by the courts on case-to-case basis. However, in the earlier precedents mention above, it is clearly laid out that the lessee is in possession of the property and has access to is unless a notice under Section 108(B)(e) of the TPA is sent to the lessor.
In Shankar Prasad and Ors.v. State of M.P. and Ors, the High Court of Madhya Pradesh held that the obligation to pay rent by the lessee did not cease, even though the godown leased out was completely destroyed by a fire, as the lessee had not sent a notice under Section 108(B)(e) of the TPA to the lessor. This position of law has also been followed by the High Court of Bombay in Amalgamated Bean Coffee Trading Company v. Surjit Singh Jolly (2017) and the Delhi High Court in Chamber of Colours and Chemicals Pvt. Ltd. v. Trilok Chand 9 (1973) DLT 510 and Airport Authority of India v. Hotel Leela Venture Ltd (2016) 231 DLT 457 . The logic governing these transactions is that unless the lessee satisfactorily surrenders the property by way of a notice, the lessee is deemed to be using the property and is obligated to pay rent. The lessee should be mindful to elaborate, in its notice, reasons as to why COVID-19 is an event of irresistible force under Section 108(B)(e) of the TPA. It is also settled law that a financial inconvenience in making payment does not qualify as a force majeure event.
Another caveat, which has to be kept in mind, is that most of the lease agreements and especially in the cases for lease of commercial establishments docontain an arbitration clause as a means for dispute resolution. Such arbitration clauses can resort to the ‘fast track procedure’ contained in Section 29B of the Arbitration and Conciliation Act, 1996. Under the fast track procedure, the arbitral tribunal appointed by the parties can conduct the proceedings in a quick and summary manner and pass the arbitral award (or judgment) within six months.
But the jurisprudence regarding the arbitration of disputes under a lease deed is currently pending resolution by the Supreme Court. In Himangni Enterprises v. Kamaljeet Singh Ahluwalia(2017) 10 SCC 706 the Court held that disputes under the TPA were non-arbitrable. The correctness of this view has been doubted in VidyaDroliavsDurga Trading Corporation 2) RCR (Civil) 542 and a reference to three judge bench is currently pending.
Shankar Prasad and Ors.v. State of M.P. and Ors. (ILR [2013] MP 2146)
Given that there a large number of unanswered and open ended questions it would be quite interesting to note that how the courts react to the Covid 19 had an impact on the commercial relationships.